10/5/19
Statistical
Summary
Current Economic Forecast
2018 estimates (revised)
Real Growth in Gross Domestic Product 1.5-2.5%
Inflation +1.5-2%
Corporate Profits 10-15%
2019
Real Growth in Gross Domestic Product 1.5-2.5%
Inflation +1.5-2.5%
Corporate Profits 5-6%
Current Market Forecast
Dow Jones Industrial Average
Current Trend (revised):
Short Term Uptrend 23814-34114
Intermediate Term Uptrend 14513-30732
(?)
Long Term Uptrend 6849-30311(?)
2018
Year End Fair Value 13800-14000
2019 Year End Fair Value
14500-14700
Standard & Poor’s 500
Current
Trend (revised):
Short Term Uptrend 2611-3511
Intermediate
Term Uptrend 1383-3193
(?) Long Term Uptrend 937-3217 (?)
2018 Year End Fair Value 1700-1720
2019 Year End Fair Value 1790-1810
Percentage
Cash in Our Portfolios
Dividend Growth Portfolio 56%
High Yield Portfolio 55%
Aggressive Growth Portfolio 56%
Economics/Politics
The Trump economy is a neutral for equity
valuations. This week’s data were negative: above
estimates: weekly mortgage and purchase applications, month to date retail
chain store sales, September light vehicle sales, the Dallas Fed manufacturing
index, the September manufacturing PMI; below estimates: weekly jobless claims,
the September ADP private payroll report, September nonfarm payrolls, August
construction spending, the September Chicago PMI, the September ISM
manufacturing and nonmanufacturing indices, the September NY Fed ISM index, the
August trade deficit; in line with estimates: August factory orders/ex
transportation, the September Markit services and composite PMI’s.
Air cargo rates
continue to fall.
The primary indicators were also negative:
August construction spending (-), September nonfarm payrolls (-) and August
factory orders/ex transportation (0). The call is negative. Score: in
the last 207 weeks, sixty-seven were positive, ninety-two negative and forty-eight
neutral.
Update
on big four economic indicators.
As I noted several times, the
numbers were the primary news event of the week. More specifically, their horribleness. Not
only were they abysmal here but so was the global data. That said, this is one week’s stats (how many
times have I said that?). I still see
the data pattern as erratic; but investors apparently woke up (at least for a
day) to the fact that everything is not coming up roses. In the end, I am not changing my forecast on
one week’s numbers.
Overseas, the stats were negative, providing
little reason to alter my opinion that the global economy is a drag on our own.
[a] August
EU unemployment was better than expected, its September manufacturing, services
and composite PMI’s was abysmal, while August retail sales and September core
CPI was in line; August German retail
sales, the September services and composite PMI’s and September CPI were below
estimates while the September manufacturing and construction PMI’s were above;
Q2 UK business investment and September new car sales were above forecasts, Q2
GDP growth was in line, September UK housing prices and the construction PMI
were disappointing,
[b] August
Japanese housing starts and construction orders were awful; September consumer
confidence, its Q3 August all industry capex and small manufacturers index were
below estimates; August Japanese unemployment, the Q3 large manufacturers and
nonmanufacturers indices were above; September services and composite PMI’s
were in line; finally, the government has raised the national sales tax---not a
boost to growth,
[c] the September Chinese Caixin
manufacturing and composite PMI were better than anticipated while the service
PMI was worse.
Developments this week that impact the
economy:
(1)
trade: the only trade related headline this week
was Trump imposition of $7.5 billion in tariffs on EU goods. While that certainly doesn’t help global
economic growth, $7.5 billion is a wart on a goat’s ass in the scheme of
things.
There was the usual amount of happy talk on
the upcoming US/China trade talks. Those
start next Thursday. So, expect some
major headlines.
(2) fiscal
policy: no news this week.
(3) monetary
policy: a couple of points:
[a] an FOMC meeting is coming up next
week. Given the recent string of poor
economic data both here and abroad, I think the odds are quite high of another
rate cut,
[b] last week, the Bank of Japan declined to
raise its key interest rates. Then this
week, it indicated that it was moving toward tighter monetary policy,
suggesting that the only thing that its QE had accomplished was to wreck its
financial system. Duh. That has been obvious for the last five
years. What we need now is for the light
to go on at the Fed and the ECB, moving them in the same direction. Alas, don’t count on it.
What is the ECB doing?
Which leaves my bottom line unchanged: the
lion’s share of central bank policy moves over the last ten years has been a
negative [asset mispricing and misallocation] for global growth and will remain
so as long as they pursue their irresponsible QE. The only beneficiaries of this policy have
been the securities market which are now grossly overvalued,
[c] the current dollar liquidity problem may
be another manifestation of the failed global QE Infinity policy. So far, the Fed has kept the problem under
control. But when, as and if, the
Markets lose faith in the central banks’ ability to manage monetary policy,
trouble is a heartbeat away.
Weakening the dollar is the global economy’s
last hope (must read).
And the beat goes on.
(4) global
hotspots. The biggest headline this week was on the looming Brexit at the end
of this month. The politics of this
situation is very confusing. My bottom
line is that a ‘no deal’ Brexit would be a negative for global growth, at least
in the short term.
In addition, the US and North Korea resume
nuclear talks today; although the significance is marginal.
(5)
impeachment: I am adding this to the list of
concerns. I will continue to avoid
political commentary. Though I believe
that more intense the situation becomes, the more it will negatively affect
businesses and consumers willingness to invest/spend.
Bottom line:
on a secular basis, the US economy is growing at an historically below
average rate and I see little reason for any improvement. The principal cause of the restraint being totally
irresponsible fiscal (running monstrous deficits at full employment adding to
too much debt) and monetary (pushing liquidity into the financial system that
has done little to help the economy but has led to the gross mispricing and
misallocation of assets) policies.
Cyclically, the US economy continues to limp
along which is not surprising given the lethargic global economy and the
continuing trade wars. Indeed, this
progress is a miracle given all the aforementioned fiscal and monetary
headwinds.
The
Market-Disciplined Investing
Technical
The Averages
(26573, 2952) rallied hard on Friday, closing the 10/2 gap down open and
negating Wednesday’s break below their 100 DMA’s. Plus, breadth looked good. On the other hand, volume was down, the VIX
remained above both MA’s and in a very short term uptrend and the long bond,
gold and the dollar are all back acting as safety trades.
I still think the
pin action supports the assumption that momentum remains to the upside. But there is enough cognitive dissonance
coming from multiple sources that if the indices can’t make a new high, that
assumption comes into question.
Too much optimism?
Meanwhile, as I
noted above, the long bond, gold and the dollar are moving higher which doesn’t
usually occur when stocks are moving higher.
Friday in the charts.
Fundamental-A
Dividend Growth Investment Strategy
The DJIA and the S&P are well above ‘Fair
Value’ (as calculated by our Valuation Model), the improved regulatory
environment and the potential pluses (?) from trade notwithstanding. At the moment, the important factors bearing
on Fair Value (corporate profitability and the rate at which it is discounted)
are:
(1)
the extent to which the economy is growing. The economy continues to struggle forward
against multiple headwinds, not the least of which are the weakness in the
international stats and the fallout from the US/China trade dispute. This week’s data was quite negative; though I
think this has to be viewed in the context of the erratic dataflow of the last
five years.
I was surprised when investors reacted negatively
to economic bad news on Wednesday. But
that didn’t last long. On Thursday and
Friday, stocks were up on bad economic news---because, you know, the Fed will
ease. So, apparently bad economic news
continues to be good Fed news.
(2)
the [lack of] success of current trade
negotiations. If Trump can create a
fairer political/trade regime, it would almost surely be constructive for
secular earnings growth.
While the major
headline in trade this week was the imposition of tariffs on EU goods, it
wasn’t all that big a deal. $7.5 billion
in tariffs is minor when compared to the US/China war.
Speaking of which,
top negotiators from both countries meet this week. Whatever the outcome, it is apt to have an
impact on stock prices.
As you know, I don’t
believe that the Chinese have any incentive to negotiate on their industrial
policy and IP theft, at least until after the 2020 elections and maybe not even
then. Clearly, I could be dead wrong. If
I am and Trump gets the changes he wants, then the outlook for increased trade
and a stronger economy improves markedly.
If Trump gets out maneuvered, then while the short term prospects for
growth will rise, the US will be still stuck with the longer term burden on
unfair Chinese industrial policies and IP theft.
(3)
the resumption of QE by the global central banks. This week the Japanese appeared to be moving
toward a tighter monetary regime. The
reason given was that years and years of QE had wrecked their banking system;
hence a different approach made sense.
And speaking of sense, that is the first sign that someone out there in
central banker land may be figuring out what an abomination QE has been and the
damage it has done to the pricing of risk.
Of course, there are few signs that any other
central bank is considering such a move.
Indeed, the poor US stats this week are pointing to a further cut in
rates by the FOMC this month. That should
keep US investors happy as little has happened that would suggest an unwinding
of the Market/Fed codependency.
Powell spoke on Friday. It was a
nothing burger.
(4)
impeachment. as I noted above, the more vicious this
battle becomes the more likely it is to have a negative effect on stock prices.
(5)
current valuations. I believe that Averages are grossly
overvalued [as determined by my Valuation Model]. The economy [whether US or global] isn’t
improving. There could be a trade deal that would brighten the outlook. But there has been so many ups and downs in
the negotiations, I think that a healthy dose of skepticism on a positive
outcome is warranted.
Of course, as usual, I have to conclude that
all of the above are irrelevant as long as investors believe the central banks
have their back. While I still believe
that the monetary policies of the last decade have stymied not aided economic
growth, that they have created valuation bubbles through the mispricing and
misallocation of assets and that they have led to a pronounced inequality in
the distribution of wealth, I am clearly in the minority. Nonetheless, I also believe that investors
will ultimately awake to the damage the monetary regime of the last decade has
done and the unwinding of these effects will not end well for them.
As prices continue to rise, I will be primarily
focused on those stocks that trade into their Sell Half Range and act accordingly.
Despite the Averages being near all-time highs, there are certain segments of
the economy/Market that have been punished severely (e.g. health care) with the
stocks of the companies serving those industries down 30-70%. I am compiling a list of potential Buy
candidates that can be bought on any correction in the Market; even a minor
one. As you know, I recently added
AbbVie to the Dividend Growth and High Yield Buy Lists.
Bottom line: fiscal policy is negatively
impacting the E in P/E. On the other
hand, a new regulatory environment is a plus.
Any improvement in our trade regime with China should have a positive
impact on secular growth and, hence, equity valuations---if it occurs. More important, a global central bank ‘put’ has
returned and, if history is any guide, will almost assuredly be a plus for stock
prices.
As a reminder, my Portfolio’s cash
position didn’t reach its current level as a result of the Valuation Models
estimate of Fair Value for the Averages.
Rather I apply it to each stock in my Portfolio and when a stock reaches
its Sell Half Range (overvalued), I reduce the size of that holding. That forces me to recognize a portion of the
profit of a successful investment and, just as important, build a reserve to
buy stocks cheaply when the inevitable decline occurs.
